Govt Mulls Reintroduction of Estate Duty; All You Need to Know About It

As the finance minister in the previous United Progressive Alliance (UPA) government, P Chidambaram toyed with the idea of re-introducing estate duty to increase government revenues during 2012-13. As soon as he took charge as the minister of state for finance in the current National Democratic Alliance (NDA) government, Jayant Sinha (he is now MoS, civil aviation) expressed similar sentiments. If media reports are to be believed, Finance Minister Arun Jaitley, who has earlier expressed his opposition to the idea, may finally be coming on board — reports also say that he may reintroduce the tax in the coming Budget. In that case, the death tax, a moniker often used to describe the tax, would make a comeback.

Simply put, inheritance tax is paid on the assets that are passed on from one generation to another at the time of the demise of the owner. Let us examine the past, present and the likely future of this tax in India.

The past

In India, estate duty was introduced in 1953, with an aim to promote inter-generational equity and better distribution of wealth. Increasing revenue earned through direct tax collection was another motive.

For it failed to address wealth inequality among Indians apart from denting government coffers owing to high cost of administration (authorities ended up spending too much to chase a pittance), the then Prime Minister Rajiv Gandhi-led government in the year 1985 abolished estate duty.

While the regime was in place:

• The tax was payable only by legal heirs.

• The highest slab rate was 85 per cent on an estate worth over Rs 20 lakh.

• While all assets below a threshold of Rs 1 lakh were exempt, the threshold for a Hindu Undivided Family (HUF) property was Rs 50,000.

• If the property of a donor was passed to his heirs two years before the death, he was not liable to pay taxes.

• To avoid double taxation, it was also provided that if a person dies within two years of transferring his property and gift tax had been paid, the amount will be set off against the estate duty.

• If one inherited property on the death of one's spouse, no tax had to be paid.

The then finance minister VP Singh conceded that estate duty failed to reduce the wealth gap, and abolished it in 1985.

"Estate duty hasn't achieved the twin objectives with which it was introduced ─ to reduce unequal distribution of wealth and assist states in financing their development schemes," Singh had said at that time.

The present

With similar intentions, the government also introduced gift tax in 1958, only to scrap it in 1998. Once again, the cost of administration was way higher than the revenue earned. The tax was, however, reinstated through Finance Act of 2004, with some alterations in place. As it stands today, cash gifts of over Rs 50,000 and other gifts, including gifts of immovable property, which are worth over Rs 50,000, are taxable in the hands of the receiver, if received without any consideration. Receiving an inadequate consideration would also make a case for tax payments.

In case of an immovable property, gifts received by way of a will or inherited in contemplation of death are exempt. Also exempt are gifts of immovable property if the property is received by an HUF from its members, or if the property is received on occasion of your marriage.

Do note here that in case of estate duty, the responsibility to pay the tax stands with the donor; in case of gifts, the recipient is responsible for paying taxes.

Likely future

In case the death tax does return, high net-worth individuals will have a reason to worry. Currently, some nations impose estate duty as high as 80 per cent. However, when the Centre comes back with the death tax, say media reports, the rates may be kept between 5 and 10 per cent, a remarkable reduction from its previous level of 85 per cent.  

Media reports also say that families with a certain net-worth, mostly high-net-worth individuals, will be kept under the tax bracket. According to an Asia Pacific 2016 Wealth Report, India is home to 2.36 lakh high-net-worth individuals.

Family trusts will remain outside the ambit of the law if it makes a comeback. In case of a family trust, only the shareholding of members changes without any transfer of ownership.

How ready are we for an inheritance tax now?

As it struggles to tap additional sources to earn better revenues, the government might have brought back the idea to impose an estate duty at the centre-stage. However, difficulties' galore awaits it on its way.

Attempts are being to circumvent the law already: In the past five-six years, rumours about the government reintroducing the tax ran wild. Anticipating the second coming of the death tax, people have already started forming family trusts on which inheritance tax will not apply, say media reports. Under the current law, one is not liable to pay taxes if a property is received by an HUF from its members.

“In recent times, there has been a buzz in HNI circles that to boost revenue, the government may reintroduce estate tax (inheritance tax) and, therefore, trust structures have been actively considered and deployed,” Praveen Bhambani, a partner at PwC India, was quoted by The Economic Times as saying.

Hard to predict matters of life and death: Life expectancy among Indians has been improving. According to data available with the World Bank, the average life expectancy at birth stood at 68 years in 2015. In 1960, this number stood at 41 years. In light of that fact, it would be difficult to gauge and predict the quantum of revenue the government will be able to earn from the death tax. 

Lack of social security: Inheritance tax is levied by several developed nations, including the US, the UK, Germany and the Netherland. However, these countries also have a robust social security system in place. The presence of government-led social security acts as an antidote to the tendency of amassing wealth for future.  This is something entirely absent in India. Lack of adequate social security fuels the need to amass wealth.

Questions on likely success: As was witnessed in India when the tax was live between 1953 and 1985, attempts to earn revenue by imposing inheritance tax may often not yield the desired results. In 1984-85, the government earned Rs 20 crore as estate duty, which was 0.4 per cent of the Rs 5,329 crore collected through direct taxes that year.

Developed countries are facing similar issues even now. In the US, for instance, inheritance tax provides for a major exemption. Resultantly, it applies to only a few households, generating very little revenue.